Europe Pressures Intensify

Aug 22, 2012

 

Germany's Merkel Faces Tough Choices as Greek Crisis Threatens Euro Anew

 

BERLIN—German Chancellor Angela Merkel faces one of the toughest choices of her career in the coming weeks: whether to risk the unraveling of the euro zone, or her government.

After a summer lull, Greece is again Ms. Merkel's biggest headache.

The Greek government, struggling with depression-like conditions that have pushed the economy to the brink, is likely to need many billions of euros of additional aid to avoid bankruptcy.

If Athens doesn't get the money, it may be forced to leave the euro, an outcome that would undermine financial markets' tenuous confidence in other vulnerable southern euro members, including Spain and Italy.

An expansion of Greece's €173 billion ($213.4 billion) bailout that was agreed to this spring faces adamant opposition in Ms. Merkel's center-right coalition in Germany's parliament, the Bundestag.

Her junior coalition partners are especially against lending Greece more money, threatening to leave her either without a governing majority—or without a plausible way to cover Athens's funding gap.

"It is one of the hardest dilemmas she has faced as chancellor," said an adviser to Ms. Merkel. The chancellor is set to meet with French President François Hollande on Thursday and Greek Prime Minister Antonis Samaras on Friday, meetings the chancellor's aides say will help determine Berlin's course.

Since the euro-zone crisis began in Greece in late 2009, critics have accused Ms. Merkel of playing for time, putting off difficult decisions until the last minute. Greece's penury could force her hand, however: Athens could run out of cash by October unless European authorities and the International Monetary Fund release its next slices of international aid. But for the IMF especially, that requires the bailout math for coming years to add up.

The chancellor isn't likely to reach a decision for several weeks, German officials said. In part, they said, she is waiting for two developments that could expand or constrain her options: Germany's constitutional court is due to rule on Sept. 12 on whether the euro zone can launch its permanent bailout fund, and inspectors from the European Union and the IMF are due to report on the size of Greece's finance shortfall. The latter could take until October, some euro-zone officials say.

France is eager to keep the euro zone intact, but advisers to Mr. Hollande said Greece's fate is increasingly tied to German domestic politics.

Mr. Samaras is expected to stress Greece's overhauls, while gently pressing for more time for budget cuts.

Protecting Italy and Spain from capital flight has become the euro zone's biggest challenge, thanks to the two countries' size.

But although Greece accounts for barely 2% of the euro-zone economy, its debt crisis remains potentially destabilizing because its exit from the currency would prove that euro membership is reversible—scaring even more investors away from financially stressed southern Europe.

Greece's ballooning funding needs are part of a bundle of problems that will preoccupy euro-zone leaders in coming weeks.

Others include working out how the European Central Bank and the euro-zone bailout fund can prop up the wobbly bond markets of Spain and Italy; how to create a common system of supervision and financial safety nets for euro-zone banks; and how far Europe must move toward a full-blown fiscal union with central budget controls and common borrowing.

Some officials in Berlin and other key euro-zone capitals hope leaders will be able to find answers by the time they hold their next summit on Oct. 18.

The overall aim, said a senior euro-zone policy maker, will be "to erase the uncertainty in the markets about the survival of the euro."

Europe's previous attempts at a "comprehensive package" of measures to shore up confidence in the currency union, including in March and October 2011, achieved only brief calm in financial markets, however.

Ms. Merkel has often warned that the crisis can't be solved in one fell swoop. Imbalances in euro members' finances and competitiveness that built up over years within the euro zone will take years to correct, she has argued.

The Greek government is struggling to make ends meet within the loan package that Europe and the IMF granted it this spring, because the country's recession is deeper than forecast, planned privatization revenue is proving elusive, and its politicians have fallen behind on promised overhauls of the Greek state and economy.

The "troika" of inspectors from the EU, ECB and IMF is expected to report that Greece faces a sizable funding shortfall between now and 2014, even taking into account Athens' promised €11.5 billion of spending cuts. Greece's request to spread those cuts over an extra two years, completing them by 2016 instead of 2014 as agreed earlier, would also push up its borrowing needs substantially.

In addition, privatization revenue is widely expected to fall far short of the €12 billion envisaged through 2014, while Greece's worse-than-expected deficits and recession are set to keep its national debt far above 120% of gross domestic product in 2020, the bailout program's longer-term target.

Although the troika isn't likely to publish the size of the financial shortfall until late September at the earliest, senior euro-zone officials said the gap is so big that Greece can't close it on its own. Even-deeper spending cuts would only worsen Greece's recession rather than balancing its budget, these officials said.

That leaves a stark choice for Europe: Lend Greece extra money, or let it go bust.

If Greece can't pay pensions or public-sector wages, it would eventually have to print its own currency, or face social unrest.

Germany's Bundestag isn't the only parliament where many lawmakers are fed up with Greek politicians' failure to carry out their side of the bailout deal. Much of the political class in the Netherlands, Finland, Estonia, Slovakia and Austria is also against even-higher aid for Greece.

Ms. Merkel's coalition partners, the Bavarian conservative Christian Social Union and the pro-business Free Democratic Party, have competed with each other all summer to be the loudest in denouncing the idea of extra money for Greece.

Senior CSU figures have said Greece should quit the euro if it can't live within the March financing deal, while FDP leader Philipp Rösler said in July that the idea of Greek euro exit has "lost its terror."

Many in Ms. Merkel's own party, the Christian Democratic Union, have also lost patience with Athens and insist that Greece must live within the March 2012 aid package or leave the euro.

"There can be no question of expanding" the Greek bailout, said senior CDU lawmaker Michael Fuchs.

The problem for Ms. Merkel is that the March deal was based on optimistic forecasts that no longer match reality.

Chancellery officials believe a Greek bankruptcy and exit would be messier, costlier and more contagious for other euro members than many lawmakers think. Ms. Merkel and her finance minister, Wolfgang Schäuble, are also acutely conscious of the simmering resentment toward Germany in Southern Europe and don't want to be seen as pushing Greece out of the euro.

Ms. Merkel is thus unlikely to pull the plug on Greece this fall. But she hasn't yet figured out how to keep it afloat.

Source: The Wall Street Journal